Feds Try Creative Home Mortgage Loans to Sell Foreclosed Houses

Mark Huffman has been a consumer news reporter for ConsumerAffairs since 2004. He covers real estate, gas prices and the economy and has reported extensively on negative-option sales. He was previously an Associated Press reporter and editor in Washington, D.C., a correspondent for Westwoood One Radio Networks and Marketwatch.
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Creative financing got a bad name back in the heady days of the
real estate boom, when anyone with a pulse could qualify for a loan.
But with a rising glut of unsold homes on the market, the government
is pushing some creative loans it hopes can help spur sales.

Conventional loans are harder to get and have tighter rules. For
example, if a home needs significant repairs, a conventional loan will
require that those repairs be made prior to settlement.

In the case of foreclosures, this presents something of a problem
since the banks that own the property are generally unwilling to spend
any money on repairs, insisting that the home be purchased "as is." If
the prospective buyer can't get a conventional loan, what other
options do they have?

The Federal Housing Administration (FHA) offers something called
the FHA 203k loan,
which is tailor-made for a foreclosure purchase where repairs are
needed. Sometimes called a "rehab" loan, the 203k is actually two
loans in one.

Two loans in one

The buyer receives financing for the purchase price of the house,
and a second amount for the estimated cost of repairs, identified by
an FHA appraiser. The second amount is held in escrow while the sale
proceeds to settlement.

After settlement, the repair work is paid for with the escrow fund.
The homebuyer pays one mortgage that includes the financed portion of
the purchase price and the cost of the repairs.

This loan is only available to buyers who plan to make the property
their primary residence. It cannot be used to finance second homes or
investment property.

The loan takes longer to close than a conventional loan and has
higher costs. Its interest rates, however, are fairly competitive,
based on the buyer's credit score.

For foreclosures only

Fannie Mae, meanwhile, has a loan program especially for financing
properties that it has repossessed. It's called the HomePath
Mortgage, but is available only on eligible property.

Â· Down payment (at least 3 percent) can be funded by your own
savings; a gift; a grant; or a loan from a nonprofit organization,
state or local government, or employer

Â· No mortgage insurance

Â· No appraisal fees

Â· Also eligible for HomePath Renovation Mortgage

Â· HomePath Mortgage financing is available from a variety of
lenders - both local and national.

"More than 87,000 families have purchased HomePath properties in
the first half of 2010 - nearly double the number of Fannie Mae
foreclosed properties sold in the first half of 2009," said Terry
Edwards, executive vice president of Fannie Mae's Credit Portfolio
Management. "We continue to look for ways to stabilize neighborhoods
and offer incentives to qualified buyers who will occupy these
properties over the long term and help support their communities."

Fannie Mae is even offering a special incentive to qualified home
buyers who will be owner-occupants. If they close before December 31,
2010, they can receive up to 3.5 percent of the final sales price that
can be used toward closing-cost assistance. In addition, selling
agents representing owner-occupants will receive a $1,500 bonus.

As in the case with the FHA 203k loan, rates for Home Path loans
are competitive, based on credit score.

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